Treasuries Are Biggest Losers as Economic Surprise Index Gains

Treasuries were the world’s worst-performing government bonds over the past 12 months as a measure of U.S. economic data showed figures are surpassing expectations by the most this year.

Notes and bonds due in a decade or more fell 13 percent in the period, the biggest loss of 174 debt indexes tracked by Bloomberg and the European Federation of Financial Analysts Societies. The Citigroup Economic Surprise Index, which shows whether U.S. data beat or missed expectations, climbed to 36.7, the highest level since Dec. 31. Improvement in the economy is fueling expectations the Federal Reserve will curb the bond-buying program it uses to support the expansion.

“The U.S. economy will have steady growth,” said Kei Katayama, who buys non-yen debt in Tokyo for Daiwa SB Investments Ltd., which manages the equivalent of $50.6 billion. “Only the U.S. is approaching the exit policy” as the Fed contemplates reducing its monetary stimulus. Katayama said he trimmed the duration of his holdings in July, favoring shorter maturities that will fall less if yields rise.

Benchmark 10-year yields were little changed at 2.63 percent as of 6:53 a.m. in London, according to Bloomberg Bond Trader data. The price of the 1.75 percent note due in May 2023 was 92 14/32. While the yield has risen from the record low of 1.38 percent set last year, it is still less than the average of 3.55 percent for the past decade.

Japan’s 10-year yield slid two basis points, or 0.02 percentage point, to 0.76 percent today. The nation’s government bonds returned 0.5 percent in the past year, based on the Bloomberg Japan Sovereign Bond Index.

The Treasury Department is scheduled to sell $24 billion of 10-year notes today. At the last sale of the securities on July 10, investors bid for 2.57 times the amount of debt available. The average for the past 10 sales is 2.81.

Auction Results

A $32 billion three-year sale yesterday drew the most demand in two years from the investor class that includes foreign central banks.

Indirect bidders purchased 41.4 percent of the debt, the most since August 2011. The figure compared with an average of 26.1 percent at the past 10 sales before yesterday’s.

The securities sold at a yield of 0.631 percent, compared with a forecast of 0.636 percent in a Bloomberg News survey of eight of the Fed’s 21 primary dealers, the companies that underwrite the U.S. debt.

The government plans to conclude this week’s auctions with a $16 billion 30-year sale tomorrow.

Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index was 78.18 basis points yesterday. The average for 2013 is 67.28.

More Appealing

The increase in yields is making Treasuries more appealing, said Yoshiyuki Suzuki, head of fixed income at Fukoku Mutual Life Insurance Co. in Tokyo, which has the equivalent of $58.5 billion in assets.

“U.S. government bonds have not been a good place to bet, but now is a good opportunity to invest,” Suzuki said. “Yields are getting more attractive.” Fukoku bought earlier this year, he said.

Fed Bank of Chicago President Charles Evans indicated a tapering of the central bank’s bond-buying program in September is possible.

Evans said yesterday the central bank probably will have bought at least $1.2 trillion of bonds from January 2013 until the time he sees the current quantitative-easing program ending in mid-2014.

“We’ve seen good improvement in the labor market,” Evans said in Chicago. “I’m still wanting to see greater evidence that it’s a sustainable improvement” and “I would clearly not rule” out a decision to begin dialing back the purchases in September.

Fed Bank of Dallas President Richard Fisher said Aug. 5 the central bank is closer to slowing $85 billion in monthly bond buying and warned investors not to rely on that stimulus. Evans votes on monetary policy this year, while Fisher does not.

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